Tuesday, December 14, 2010

EU bonus curbs are bad for Britain

Banker-bashing - it’s become a December ritual to rank up there with carol singing and Christmas lights. Investment banks announcing big bonus pots inevitably attract criticism of the “greedy casino capitalist fat cat” variety, particularly from politicians perhaps keen to deflect critical reviews of their own performance and economic management.

This year the EU has weighed in with some new rules limiting the amount of bonus that can be paid in hard cash and also restricting the right of the recipient to cash in all of their bonus for several years. It’s an easy sell for the Eurocrats politically – few voters are keen to see bankers getting big bonuses, particularly when they amount to rewards for failure (AIB which almost bankrupted Ireland tried to pay out €40 million in bonuses).

But nevertheless the new restrictions are a clear erosion of freedom – the right of private organisations to pay their staff how they see fit – and deserve some scrutiny. The excuse for their introduction is the “systemic” risk posed by banks; the idea that if banks pay their staff big cash bonuses, this will encourage excessive risk taking and sow the seeds of future bailouts and crashes.

However many studies into the subject have failed to find a link between bonus systems and risk taking at banks. I just read a great book about the collapse of Lehmans (“A Colossal Failure of Common Sense”). It is scathing about the bank but doesn’t mention anything about cash bonuses being the problem – in fact Lehmans always paid its bonuses mostly in shares, just the like the new rules propose. If it is felt that banks pose a systemic risk this should be tackled (and is being tackled) in the right way – requiring they put up a bigger capital buffer as a requirement of doing business – not in a politically motivated attempt to stigmatise bank employees.

There is of course a hidden subtext behind the unjustified attack which will undoubtedly contribute to an erosion of the City’s competitive position as a financial centre. Our European “friends” have long been envious of the power of London which was supposed to decline when the Euro came in but actually thrived. The financial crisis has been a great opportunity for left-leaning, anti-capitalist and unelected Europeans to lay into one of the UK’s main strategic industries. The British government should be doing everything possible to delay and block these new rules.

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1 comment:

  1. On the topic of bonuses and encouraging employees: http://www.youtube.com/watch?v=u6XAPnuFjJc


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